Fidelity Moneybuilder Dividend, JOHCM UK Equity Income, Majedie UK Income and CF Woodford Equity Income are the only four funds in the IA UK Equity Income sector to feature across FE’s AFI cautious, balanced and aggressive model portfolios, according to research from FE Trustnet.
The AFI panel consists of a selection of leading financial advice firms, all of which choose a portfolio of funds for each themed index; they are each allowed to choose a maximum of 10 holdings which are weighted by the panellists themselves.
FE then aggregates these portfolios to produce an overall weightings list for the indices, the performances of which are shown below over five years.
Performance of indices over 5yrs
Source: FE Analytics
When breaking these indices down in terms of sector, FE Trustnet found that four funds in the IA UK Equity Income sector appear an all three risk-adjusted models and, in the article below, we take a look at these investment vehicles in greater detail.
Launched by star manager Neil Woodford (pictured) in 2014, this £8.4bn fund focuses on both growth and income and will hold between 50 and 100 stocks at any one time, none of which are chosen in relation to its FTSE All Share benchmark. 
Despite the fact that Woodford Investment Management was only established less than two years ago, the firm has been the second most popular fund group in the Balanced index (which represents a pension portfolio for people in their 30s with a retirement age of 65) and the fifth most popular in the Aggressive index (which represents a pension portfolio for people in their 20s with the same retirement age) over the last two rebalances.
The CF Woodford Equity Income fund itself is the third most popular fund in the cautious index (a hypothetical pension portfolio for those in their 40s) over the last two rebalances.
This is because of the stellar reputation that Woodford earned during his time at Invesco Perpetual, where he managed to significantly outperform his peers by making contrarian calls prior to bear markets including the tech bubble’s burst in 2000 and the financial crisis of 2008. During his 26 years at the helm of Invesco Perpetual High Income, it more than tripled the performance of its peer group composite with a total return of 1719.58 per cent.
His flagship Woodford Equity Income fund has delivered an even stronger performance compared to its peers since its launch so far, comfortably quadrupling the IA UK Equity Income sector’s average total return of 3.77 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
It is also in the top decile for its alpha generation since its launch, which measures returns made in addition to its benchmark, although it is in the third quartile for its annualised volatility over the same time frame.
“We recommend investors be prepared for short periods of underperformance, and judge its success over the long term,” the FE Research team said.
CF Woodford Equity Income has a clean ongoing charge (OCF) of 0.75 per cent and yields 3.47 per cent.
Managed by James Lowen and Clive Beagles since 2007 and 2008 respectively, this £2.8bn fund is soft closed and unavailable to new direct investors, although existing investors can continue to buy into the fund.
It has a concentrated portfolio of 60 holdings, more than a third of which are currently small and mid-caps. The managers also adhere to a strict dividend yield discipline which often leads to contrarian stock selection due to their emphasis on higher yielding companies.
In an article published earlier this month, Lowen told FE Trustnet that he was taking significant contrarian bets on large-cap oil and bank stocks.
“In the case of oil it’s been a big stimulus to the western world consumer sector and we’ve seen that here in the UK in terms of where the petrol price is,” he said.
“We’re cognisant of this and all the other risks including structural risks, but we have to link this to the valuation agenda in the market. There’s no point in us populating our fund with stocks that have very low fundamental risks but very high valuation risk.”
The fund’s largest holdings include the likes of Royal Dutch Shell, BP, HSBC and Lloyds. While this means that the fund is in the bottom decile for its annualised volatility over the managers’ tenure, it has delivered a strong long-term performance, having provided a total return of 106.54 per cent over the same time frame compared to its average peer’s return of 65.27 per cent.
Performance of fund vs sector under Lowen and Beagles
Source: FE Analytics
JOHCM UK Equity Income has a clean OCF of 0.67 per cent and yields 4.29 per cent.
Fidelity Moneybuilder Dividend
This four crown-rated fund has more of a bias towards large-caps and adopts a blended growth and value approach to provide investors with dividend growth and long-term outperformance.
It has been run by Michael Clark, who has been at Fidelity for 15 years, since 2008 and has outperformed its sector average by 18.69 percentage points over this time with a total return of 95.56 per cent.
Performance of fund vs sector under Clark
Source: FE Analytics
The fund has also fared well in terms of its risk metrics, having achieved a top-decile Sharpe ratio, which measures risk-adjusted returns, maximum drawdown, which measures the most potential money lost if bought and sold at the worst possible times, and its annualised volatility.
“The fund is managed using a cautious, long-term approach and if markets trend sideways or turn down, this fund is likely to produce total returns which are modestly ahead of the performance of the FTSE All Share index,” the Square Mile research team, who awarded the fund an ‘A’ rating, said.
“However, it is likely to lag the index in any strong upward trend.”
While Fidelity Moneybuilder Dividend delivered an above-average performance during the financial crisis of 2008, the European debt crisis in 2011 and the taper tantrum in 2013 on an annualised basis, it was in the bottom quartile for its performance during the bull markets of 2010 and 2012.
Fidelity Moneybuilder Dividend has a clean OCF of 0.67 per cent and yields 4.18 per cent.
FE Alpha Manager Chris Reid’s five crown-rated Majedie UK Income fund is £1.1bn in size and aims to outperform the FTSE All Share over the long term while also paying an attractive yield.
It has a high-conviction portfolio of 60 holdings, 43 per cent of which are constituents of the FTSE 100 index. It also has a 34.4 per cent weighting in UK mid-caps, a 5.3 per cent weighting in UK small-caps, 1.8 per cent in AIM stocks and 0.1 per cent in cash. The remaining 15.3 per cent is in international stocks based either in North America and Europe.
Since its launch in 2011 it has more than doubled the FTSE All Share and outperformed its peer group composite by 36.64 percentage points with a total return of 93.18 per cent. It is also in the top decile for its alpha generation and its Sharpe ratio over the same time period, although its annualised volatility is below-average.
Performance of fund vs sector and benchmark under Reid
Source: FE Analytics
The fund’s largest underweights relative to its benchmark include Royal Dutch Shell with a 6.7 per cent underweight, British American Tobacco by 3.7 per cent, HSBC by 3.6 per cent and GlaxoSmithKline by 3.5 per cent.
In contrast, its biggest overweights include Pearson, Legal & General, Aviva, Man Group and Lloyds.
Majedie UK Income has a clean OCF of 0.77 per cent and yields 4.41 per cent.
